Nokia: A Better Bet Than Apple - Barron's

Includes: AAPL, GOOG, NOK
by: SA Eli Hoffmann

Despite shares that are up 65% over the past two years, Barron's says Finnish handset maker Nokia, which dominates the global wireless handset market with 37% market share, is still cheap. At 17.5x 2007 earnings, Nokia's shares are far more reasonable than those of rivals Research in Motion (43x) and Apple at 37x on the potential of its stylish iPhone. Bernstein analyst Paul Sagawa says investors have not yet realized Nokia's market dominance, and the yet-untapped potential of the wireless market. He looks for Nokia to post "double-digit unit growth without any price declines for some time to come." Even if shares climb another 35% over the coming year, as Sagawa projects, its P/E multiple will still drop to 13 based on his earnings estimates.

While it may have been true in the past that handsets were quickly commoditized in the past, due to Nokia's massive 1M/day output, it can now keep ahead of competitors indefinitely. Sagawa notes the Street overestimates handset saturation by using the 'new subscriber' metric, when in truth many users use one phone to access multiple accounts in different countries: "We're much further away from saturation than most people believe."

Nokia's multi-faceted phone lineup addresses just about every price category, and "every conceivable combination of consumer tastes." Charter Equity's Ed Snyder says the market has underestimated Nokia's new music phones (5610 and 5310): "While they aren't garnering the publicity of the iPhone, they are also not burdened with an expensive, low-reliability touch-screen and copious data features that have historically found little traction with the vast majority of consumers," he says, adding that music phone will likely toll the bell for most stand-alone music players. The company sits on €8.3 billion in cash, with no long-term debt, much of which it continues to use to buy back shares. An annual dividend of €0.43 is among the best in the business.

Sources: Barron's
Commentary: Nokia's Marketing Missteps Help iPhoneNokia Music Centre, Mobile Operators and iPhones/iPods
Stocks/ETFs to watch: NOK. Competitors: AAPL, MOT, ERIC, RIMM, PALM
Earnings call transcript: Nokia Q2 2007, Apple F3Q07, Motorola Q2 2007, Research In Motion F1Q08

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